Sainsbury’s shares: a decent passive income stock to buy?

Share Supermarket like Sainsbury’s (LSE:SBRY) faces a monumental decline in 2022 due to the cost of living crisis. However, the stock is now up 40% from the bottom, and even reported positive Q3 results. With a decent dividend yield of 5%, I might be tempted to buy the stock.

Christmas cheer

Sainsbury’s released its latest Q3 update yesterday. There is an improvement to its underlying sales growth, but it is important to note that the number does not take the impact of double-digit wholesale inflation into account.

Metric	Q3 2023	Q3 2022
Groceries	5.6%	12.5%
General merchandise	4.6%	-6.9%
As-is sales (e.g. fuel)	5.9%	-4.5%
As-is sales (as fuel)	6.8%	0.6%

However, CEO Simon Roberts is still confident. He upgraded the FTSE 100 firm outlook, and now expects pre-tax profit to reach the top end of its guidance of £630m to £690m. He even raised the company’s free cash flow guidance to £600m for FY23.

Sainsbury’s results did not impress, but this update shows many encouraging signs that the company is starting to establish a unique position among consumers. In fact, it outperforms many of its biggest competitors in many areas.

See the difference

The investment of £550m to expand the price match range of Aldi, and the delay in raising prices after the rest of the market, has proven beneficial. Consequently, the average selling price for the top 100 products is the lowest in the industry. As a result, customer satisfaction reached an all-time high in Q3.

So it’s no surprise that Sainsbury’s does so well over Christmas. In addition, the board says it is trading less and less to other supermarkets. And despite declining grocery volume, it still manages to excel TescoAsda, and Morrisons in the quarter.

This shows that the investment has paid off, and Kantar’s latest grocery market share data supports this. Since going down in September, Sainsbury’s has made a strong recovery, taking market share away from the likes of Asda and Morrisons.

Pick the best stocks

So, are Sainsbury’s shares worth buying? Well, the dividend yield of 5% is also guaranteed at 1.9 times. So, group dividends can help me generate passive income, because of their steady and growing dividend paying history.

Additionally, a strong debt-to-equity ratio, reduced debt pile, and stable free cash flow are positives. That being said, the slim profit margin of 1%-2% is something I am wary of. Management moves to increase prices later than the rest of the industry allows to capture market share. But this also prevents Sainsbury’s from expanding its borders.

I am confident that Sainsbury’s share price will rise in the short term. Food inflation has finally begun to decline, and the decline in energy and commodity prices has yet to materialize. Even so, I don’t see how Sainsbury’s stock can grow exponentially over the long term. The conglomerate’s e-commerce business is growing, but not enough to grow its bottom line.

The stock’s multiples always indicate fair value at that price, and its steady history of dividend payouts is definitely worth the investment.

Metric	Multiples of value
Price-to-earnings (P/E) ratio.	10.0
Price-to-sales ratio (P/S).	0.2
Price-to-book (P/B) ratio.	0.7
Price-to-earnings growth (PEG) ratio	0.1

However, there are other UK stocks with better growth potential, higher dividends, and better profits, for example Glencore and Taylor Wimpey. I’d rather invest in that name than Sainsbury’s shares. After all, JP Morgan has an ‘underweight’ rating on the stock with a price target of £2.13.